Working Paper: NBER ID: w21541
Authors: Maria Polyakova
Abstract: I take advantage of regulatory and pricing dynamics in Medicare Part D to empirically explore interactions among adverse selection, switching costs, and regulation. I first document novel evidence of adverse selection and switching costs within Part D using detailed administrative data. I then estimate a contract choice and pricing model in order to quantify the importance of switching costs for risk-sorting, and for policies that may affect risk sorting. I first find that in Part D, switching costs help sustain an adversely-selected equilibrium and are likely to mute the ability of ACA policies to improve risk allocation across contracts, leading to higher premiums for some enrollees. I then estimate that, overall, decreasing the cost of active decision-making in the Part D environment could lead to a substantial gain in consumer surplus of on average $400-$600 per capita, which is around 20%-30% of average annual per capita drug spending.
Keywords: Medicare Part D; Adverse Selection; Switching Costs; Insurance Regulation
JEL Codes: H0; H50; H51; I1; I13; L51; L78
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| switching costs (D23) | adversely selected equilibrium (D50) |
| switching costs (D23) | consumer surplus (D46) |
| switching costs (D23) | higher premiums for some enrollees (G52) |
| Affordable Care Act policies (G52) | muted risk allocation (G32) |